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The Financial Times this weekend reported what it labelled ‘one of the fiercest and most fascinating political battles of the year’ — a battle which looks set to pitch David Laws and Nick Clegg against George Osborne and the Labour leadership.

The issue concerns the amount by which the Coalition should increase benefits: based on September’s inflation figure, this should be 5.2%. The Tories are pushing for a below-inflation settlement, but Mr Laws — co-editor of The Orange Book, and firmly identified as an economic liberal — is urging the Lib Dems to reject such a move:

Mr Laws, considered a fiscal hawk, argues in a letter to Mr Clegg that people on benefits were already under severe pressure from inflation and points out that benefits – including child benefit, council tax and housing benefit – have already been squeezed. “None of us would want to see a significant rise in poverty as we try to secure both economic and social recovery in the UK,” Mr Laws says. He adds that Britain already pays some of the lowest rates of unemployment benefit in the developed world.

Mr Clegg is understood to be sympathetic to the argument of his close friend. Liberal Democrat insiders say the deputy prime minister would oppose “arbitrary and vindictive” measures that moved away from the traditional inflation-linked benefit uprating. The issue is shaping up to be one of the fiercest and most fascinating political battles of the year, as Mr Osborne decides whether to implement in full the 5.2 per cent increase when he makes his autumn statement on November 29.

What of the Labour party’s stance? Labour — the party which in government offered pensioners a paltry 75p increase compared to the Coalition’s generous ‘triple lock’, and tried to abolish the 10p tax rate which the Lib Dems have extended to help more of the poorest — is strangely silent on the matter:

Intriguingly Mr Osborne’s political instincts seem to be in tune with those of the Labour leadership, which is also trying to reclaim the support of key voters in the C2 social class. Labour has refused to attack possible below-inflation rises to out-of-work benefits next April.

The argument looks set to create an odd coalition-within-the-Coalition: Mr Laws’ concerns are said to be shared by work and pensions secretary Iain Duncan Smith who, the FT adds, ‘also opposes arbitrary changes to the way benefits are uprated and strongly contests the populist idea that most benefit claimants are in some way “scroungers”.’